December 19, 2005
BNA Business Journal
Richard Cowden

A privately funded analysis of remittance service providers released Dec. 15 has identified a lack of transparency in pricing as a significant concern and has offered a series of recommendations for approaches to providing protections for consumers who transfer funds abroad.

According to Appleseed, a legal advocacy organization, its recent survey of exchange rate data at 21 remittance operations in four states found a wide range of approaches to adjusting exchange rates, a factor that the study said impedes the ability of consumers to meaningfully determine which services offer the best options.

The study noted the rapidly expanding market for remittances from parties in the United States to Mexico, which has grown from less than $10 billion annually in 2001 to an estimated $20 billion in 2005. Despite the rapidly increasing level of this financial flow, the report said, "The remittance market is the only financial market of its size without uniform regulation."

Appleseed indicated that over time, the average cost of a remittance to Mexico has declined due to competition from about $25 for a $300 transfer in 2001 to $14.59 for the same size transfer in 2005. Among the concerns about remittance operations, however, is the widely varying pricing systems employed by the 150 or so service providers.

The typical transfer involves an average transfer fee of $9, plus an exchange rate spread, which the report called "an undisclosed difference between the price the company pays to purchase the foreign currency and the rate the money transfer company charges its customer."

Wide Range of Rate Spreads

The survey found average exchange rate spreads ranging from $1.92 to $10.80 for a $300 transaction, with an average of $5.25. Some services also charge a fee to claim the transferred funds, according to the report.

Consumers are often confused about the cost of remittances largely because not all services identify the total transaction cost before completing the transfer and because companies adjust exchange rates according to different schedules--some daily, some weekly, some on other periodic standards.

The lack of transparency in how transaction costs are priced is a disservice to consumers who use remittance services, the report said, noting that, "Companies offering lower transaction costs and exchange rate spreads are hurt because of the difficulty consumers face in consistently discerning low-cost providers."

Appleseed also said inconsistent regulation of remittance services in the international market adds further to volatility in pricing. Although legislation on the subject (the International Remittance Consumer Protection Act of 2005) has been introduced in both houses of Congress, the report said, "To date, meaningful legislation lags behind rapid developments in the market."

Several states regulate such services, the analysis said, "but few require consumer-oriented disclosures," adding that the state rules do not apply to financial institutions.

Based on the findings of its research, Appleseed offered a series of recommendations, including:

• encouragement for the remittance industry to improve customer service and to disclose exchange rate and cost information;
• implementation of a federal oversight policy on international transfers; and
• establishment of a system of third-party regulation that could set fair pricing standards.

The report said third-party regulation has been effective in areas such as the Fair Trade coffee program and might be created through a dialogue between the industry itself and consumer organizations.